coffee and currencies - international coffee organization march 2014... · the shifting exchange...

Keith Flury -Agricultural Strategist

March 4, 2014

Coffee and Currencies

How the buck impacts the bean

2

Contents

This presentation has been written by a strategy function of BNP Paribas and does not purport to

be an exhaustive analysis. This presentation may be subject to conflicts of interest resulting from

their interaction with sales and trading which could affect its objectivity. Please refer to important

disclosures at the end of this presentation.

Currency impacts

Coffee currencies

USD/BRL

Cost of production

Outlook

3

A devaluing currency (relative the USD) increases the local coffee price

Prompts selling (exports) in short term

Can encourage production in longer term

A stronger USD = bearish commodities

A weaker BRL = bearish coffee

Dollar denominated input costs can rise as the local currency falls

Fuel and fertilizer costs most susceptible

Local economies have tools to combat a devaluing currency, but concerns about inflation, foreign reserves, or impact on trade can complicate matters

The shifting exchange rates can

impact the trade flow as some

nations benefit from devalued

currencies relative to the

competition

Currency impacts

4

When prices move higher (or local values move higher due to exchange rate shifts) selling/exports generally increase. The coffee trade is a major source of foreign currency (USD) for origin nations. The coffee portion has fallen due to

increased development, but some nations still have a high share.

Coffee trade and currency

Brazilian exports and KC in BRL

Source: Procafe, Bloomberg, BNP Paribas

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

1.0

1.2

1.4

1.6

1.8

2.0

2.2

2.4

2.6

Jan 02 Jan 04 Jan 06 Jan 08 Jan 10 Jan 12

Green Exports

KC1 in BRL(RHS)

Coffee

Exports (mln

bags)

Foreign

currencies

from coffee

(mln $)

Coffee as

share of

exports

Brazil 30.9 6'744 3

Vietnam 18.6 2'510 4

Columbia 8.5 2'552 6

Indonesia 8.2 1'269 1

India 4.4 943 0

Guatemala 3.9 1'068 18

Honduras 3.7 964 19

Peru 3.6 938 3

Ethiopia 2.5 734 46

Mexico 2.3 599 0

Uganda 2.1 422 17

Nicaragua 1.8 469 34

Total 90.5 19'212 2

Coffee trade and currencies

5

As coffee increases in the share of a nations exports its importance as a USD source increases. Ethiopia, Rwanda, Honduras, and Guatemala are examples

The fate of coffee prices directly linked to the ability to buy USD denominated imports

Governments direct policy to support production/exports

As the share of production increases currency volatility impacts the international price of coffee more

Brazil is the key example of this with the BRL linked to the Arabica price

Nations that are very dependent on fickle foreign investment to finance growth are susceptible to high currency volatility (BRL, INR, IDR).

Producers wary of inflation or

stability of local currency may

hold coffee as hedge or liquid

asset

Vietnam an example

Coffee currencies

6

The shift in currency values since the Arabica peak in 2011 shows major devaluations (BRL, INR, IDR), modest moves (COP, MXN, NIO, ETB) and those

with less volatility.

Currency moves

Currency shift since 05/03/11

Source: Bloomberg, BNP Paribas

-1.0% 9.0% 19.0% 29.0% 39.0% 49.0%

USDPEN USDVND USDHNL

USDKES USDPGK USDCRC

USDCRC USDETB USDNIO

USDMXN USDCOP USDIDR

USDINR USDBRL

7

Much of the shift since the peak of coffee prices has occurred in the past year. The situation in the US (the potential end to QE3 and interest rates) is the driver.

Coffee Currencies

Source: BNP Paribas

Coffee currencies normalized from 01/11

8

The Brazilian real, the Indian rupee, and the Indonesian rupiah have seen the greatest devaluation in the past three years. This has tempered the impacts of the

falling NY market (and may have exacerbated it). In 2013/14 three nations accounted for 46% of coffee output.

Winners (the Rs)

KC1 in BRL and USD


IDR and INR spot

35

40

45

50

55

60

65

70

75

6000

7000

8000

9000

10000

11000

12000

13000

Nov 99 Nov 03 Nov 07 Nov 11

IDR

INR (RHS)

-20

-10

0

10

20

30

40

50

60

70

80

2008 2009 2010 2011 2012 2013

USc/lb

NY-Colombian NY-Brazilians NY-Other Milds

9

The shift in currencies and how that impacts local valuation of the NY market have not been compensated by differentials (which are more focused on the local

market and the supply/demand for coffee type). Strong economic outlook in Colombia has resulted in strength in the peso.

Not Winners

ICO monthly price differentials

Source: ICO, Bloomberg, BNP Paribas

KC1 in COP and BRL

10

The Brazilian real has the most impact on the coffee market of the origin currencies

The relationship has grown stronger as the Brazilian share of Arabica grows (recently)

Liberalization in currencies and coffee trade has also supported the relationship

The ability to deliver Brazilian beans to NY may have impact as well

US Fed tapering and concerns about the Chinese growth outlook may continue to erode global commodity prices and undermine capital flows into emerging markets like Brazil Brazil is now bumping up against supply constraints, as evident from its worsening external accounts and its stubbornly above-target inflation. Brazils growth-inflation trade-off is worsening

USDBRL and Arabica

11

A weaker BRL in 2000-2002 tempered the impacts of the falling Arabica prices. Conversely the shift in BRL from 2003 to the crisis supported Arabica prices. The

fall in prices since 2011 have coincided with the fall in BRL values.

USDBRL and ICE Arabica

ICE Arabica Prices and USDBRL

Source: BNP Paribas

0

0.5

1

1.5

2

2.5

3

3.5

4

0

50

100

150

200

250

300

350

Jan 00 Jan 02 Jan 04 Jan 06 Jan 08 Jan 10 Jan 12

USc/lb

KC1 USDBRL (RHS)

12

The Brazilian share of global Arabica production continues to increase along with Arabica exports. This increases the importance of the BRL for global coffee

prices.

Brazilian Arabica supply

Source: CeCafe, BNP Paribas

Brazilian and Non-Brazilian Production

10%

20%

30%

40%

50%

60%

70%

80%

95/96 98/99 01/02 04/05 07/08 10/11 13/14

Non Brazilian Share of Brazilian Arabica 15

17

19

21

23

25

27

29

31

2003/04 2008/09 2013/14

Million bags

Brazilian Arabica exports

13

The correlation between the BRLUSD and Arabica prices has increased over the past 15 years, and is generally positive. There are many other variables in the

relationship, but we find a weaker BRL has an increasingly stronger relationship with a weaker KC1.

Correlation between BRL and KC

BRL and KC 2000-2014


y = -0.784ln(x) + 5.8705R = 0.5046

0

0.5

1

1.5

2

2.5

3

3.5

4

0 100 200 300 400

y = -0.717ln(x) + 5.6365R = 0.8931

0

0.5

1

1.5

2

2.5

3

0 100 200 300 400

Monthly prices (BRL and KC 2011-2014)

-0.8

-0.6

-0.4

-0.2

0

0.2

0.4

0.6

0.8

Dec 93 Apr 97 Aug 00 Dec 03 Apr 07 Aug 10 Dec 13

24 Month correlation (BRL/KC1 monthly prices)

14

The offsetting change in currency can be seen with the ICE Arabica price in BRL 26% higher than the same price in USD.

ICE Arabica in USD and BRL

KC1 in USD and BRL normalized from 05/03/11

Source: BNP Paribas

15

Generally, falling currency values against the USD increase import costs leading to higher inflation and input costs for agricultural enterprises

Average coffee production costs in Brazil are estimated between 350-390 BRL/bag (but varies by production type, yield and other factors)

Costs have more than doubled in the past eight seasons

In Brazil the major aspects in the costs of production are labor, inputs (fertilizer/pesticide), and financing (the cost of capital). Much of this is based on policy; the cost of labor and the price of fuel.

Cost of Production

16

Given the set costs and other variables the cost of production in Brazil has not exhibited a strong relationship with the BRLUSD rate.

Cost of production

Brazilian cost of production (Arabica)

Source: CONAB/DIGEM/SUINF/GECUP, BNP Paribas

0.30

0.35

0.40

0.45

0.50

0.55

0.60

0.65

-

50

100

150

200

250

300

350

400

06/07 07/08 08/09 09/10 10/11 11/12 12/13 13/14

Cost of Production(BRL/bag)Average BRLUSD (RHS)

0.30

0.35

0.40

0.45

0.50

0.55

0.60

0.65

60

80

100

120

140

160

180

200

06/07 07/08 08/09 09/10 10/11 11/12 12/13 13/14

Cost of Production(USD/bag)Average BRLUSD (RHS)

0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

60

65

70

75

80

85

90

99/00 00/01 01/02 02/03 03/04 04/05 05/06 06/07 07/08 08/09 09/10 10/11 11/12 12/13 13/14

Million BagsArabica two year average production Average BRLUSD (RHS)

17

Brazilian output and the rate

Brazilian production and BRL

Source: BNP Paribas

18

BNP Paribas forecasts further depreciation in many emerging market economies and coffee origins.

The US economy and the QE3 taper, coupled with individual nations economic outlook will drive rates

A bearish outlook for the BRL will mean KC1 values in Brazil will increase (even more than the current rally)

Outlook

19

A weaker outlook for the BRL (18%) is bearish ICE Arabica prices (all else equal). The gap between COP (11%) and BRL is

forecast to grow impacting profitability.

BNP Paribas FX Forecasts

BNP Paribas FX forecasts*

*Quarter and year end

20

ICE Arabica prices since 2009 have shadowed the 1997-2002 bear market. This includes the current rally which is similar to the increase in prices in 1999. Even

the rate last weeks 20% surge was the largest one-week rally since Dec 1999 Reuters

Arabica Price

ICE Arabica Price

Source: BNP Paribas

50

100

150

200

250

300

1 7 13 19 25

USc/lb

Quarter

97-02 (Inflation adjusted) 09-14

21

After increasing 77% in 1999 Arabica in 2.5 months the bear market continued with prices bottoming out in 2002. The BRL lost 53% of its value between the end

of 1999 and the nadir in 2002.

1999-2004 market

BRLUSD and Arabica


0.20

0.30

0.40

0.50

0.60

0.70

40

60

80

100

120

140

Mar 99 Mar 00 Mar 01 Mar 02 Mar 03

KC1 BRLUSD (RHS)

22

In Asia forecasts call for stable dong valuation, while INR (5%) and IDR (10%) both are expected to see modest devaluation.




23

Stronger USD is the major factor




2424

Contacts Commodity Markets Strategy

Harry Tchilinguirian

Global Head, Commodity Markets Strategy,Senior Oil StrategistCommodity Derivatives

London, UK

Direct Tel: +44 (0) 20 7595 8779

e-mail: [email protected]

Stephen Briggs

Senior Metals StrategistCommodity Derivatives

London, UK

Direct Tel: +44(0) 20 7595 8774


Teri Viswanath

Senior Natural Gas StrategistCommodity Derivatives

New York, US

Direct Tel: +1(0) 212 841 3048


Gareth Lewis-Davies

Senior Oil StrategistCommodity Derivatives

London, UK

Direct Tel: +44(0) 20 7595 1225


Keith Flury

Agricultural Market StrategistCommodity Derivatives

London, UK

Direct Tel: +44(0) 20 7595 8031


Brazil S/D 13/14 14/15 15/16 Global output 13/14 14/15 15/16 Global S/D 13/14 14/15 15/16

Output 55.5 48.5 47.0 Arabica 39.0 32.0 31.0 Output 153.7 147.0 147.0

Arabica 39.0 32.0 31.0 Robusta 16.5 16.5 16.0 Arabica 86.0 80.4 80.0

Robusta 16.5 16.5 16.0 Brazilian crop 55.5 48.5 47.0 Robusta 67.7 66.6 67.0

Domestic use 21 21.5 22 Non Brl Arabica 47.0 48.4 49.0 Domestic use 146.5 148.0 150.0

Arabica 8.5 8.5 8.5 CA + MX 14.2 15.8 17.0 Arabica 80.0 80.0 80.0

Robusta 12.5 13 13.5 Colombia 12.0 12.3 12.5 Robusta 66.5 68.0 70.0

Exports 28.3 28.2 28.3 Total Arabica 86.0 80.4 80.0 Change in stocks 7.2 1.0- 3.0-

Arabica 27 27 27 Other Robusta 51.2 50.1 51.0 Arabica 6.0 0.4 -

Robusta 1.3 1.2 1.3 Robusta 1.2 1.4- 3.0-

Stocks 8.3 7.1 3.8

Arabica 7.3 3.8 0.7-

Robusta 1.0 3.3 4.5

25

In order for Arabica stocks to contract Brazilian production needs to drop significantly below 50 million bags.

Fundamental Projections

Projections for coming seasons

26

Important disclosures

16/11/2013

This presentation has been written by our strategy teams. Such commentary does not purport to be an exhaustive analysis and may be subject to conflicts of interest resulting from their

interaction with sales and trading which could affect the objectivity of this commentary. (Please see further important disclosures below).

This Commentary is prepared by persons within the Trading function (which includes Sector Specialists) within the BNP Paribas group of companies (collectively BNPP). This is not a

research report nor prepared by the BNPP Research Department and the views expressed herein may differ from those of the Research Department. This Commentary should not be

considered objective or unbiased. BNPP may engage in transactions in a manner inconsistent with the views expressed in this material. BNPP trades as principal in the instruments (or

related derivatives), does have proprietary positions in the instruments (or related derivatives), and will likely make markets in the instruments (or related derivatives) discussed herein.

The author of this Commentary will know the nature of firm trading positions and strategies. Marketing and Trading personnel are indirectly compensated based on the size and volume

of their transactions. This material is based upon information that BNPP considers reliable as of the date hereof, but BNPP does not represent that it is accurate and complete. This

material is for the general information of BNPPs clients and is a general solicitation of derivatives business for the purposes of, and to the extent it is subject to, 1.71 and 23.605 of

the U.S. Commodity Exchange Act. This material should not be construed as an offer to sell or the solicitation of an offer to buy any security in any jurisdiction where such an offer or

solicitation would be illegal. This material does not constitute a recommendation or take into account the particular investment objectives, financial conditions, or needs of individual

clients. Certain transactions or securities mentioned herein, including derivative products, give rise to substantial risk, including currency and volatility risk, and are not suitable for all

investors. BNPP transacts business with counterparties on an arms length basis and on the assumption that each counterparty is sophisticated and capable of independently evaluating

the merits and risks of each transaction and that the counterparty is making an independent decision regarding any transaction. Unless governing law provides otherwise, all transactions

should be executed through the BNPP entity in the investors home jurisdiction. The author(s) attest that the views expressed in their attached commentary accurately reflect their

personal views about any of the subject securities, issuers, or markets; and that no part of their compensation was/is/will be directly or indirectly related to the expressed

recommendation or views

BNP Paribas is incorporated in France with limited liability. Registered Office 16 Boulevard des Italiens, 75009 Paris. This commentary was produced by a BNP Paribas group company.

This commentary is for the use of intended recipients and may not be reproduced (in whole or in part) or delivered or transmitted to any other person without the prior written consent of

BNP Paribas. By accepting this document you agree to be bound by the foregoing limitations.

Certain countries within the European Economic Area

This commentary is solely prepared for professional clients. It is not intended for retail clients and should not be passed on to any such persons. This commentary has been approved for

publication in the United Kingdom by BNP Paribas London Branch. BNP Paribas London Branch (registered office: 10 Harewood Avenue, London NW1 6AA; tel: [44 20] 7595 2000; fax:

[44 20] 7595 2555) is authorised by the Autorit de Contrle Prudentiel and the Prudential Regulation Authority and subject to limited regulation by the Financial Conduct Authority and

Prudential Regulation Authority. Details about the extent of our authorisation and regulation by the Prudential Regulation Authority, and regulation by the Financial Conduct Authority are

available from us on request. BNP Paribas London Branch is registered in England and Wales under no. FC13447. www.bnpparibas.com . Details of the extent of our authorisation and

regulation by the Financial Services Authority are available from us on request.

This commentary has been approved for publication in France by BNP Paribas, a credit institution licensed as an investment services provider by the CECEI and the AMF, whose head

office is 16, Boulevard des Italiens 75009 Paris, France. This commentary is being distributed in Germany either by BNP Paribas London Branch, or by BNP Paribas Niederlassung

Frankfurt am Main, regulated by the Bundesanstalt fr Finanzdienstleistungsaufsicht (BaFin).

United States: This commentary is being distributed to US persons by BNP Paribas Securities Corp., or by a subsidiary or affiliate of BNP Paribas that is not registered as a US broker-

dealer to US major institutional investors only. BNP Paribas Securities Corp., a subsidiary of BNP Paribas, is a broker-dealer registered with the Securities and Exchange Commission

and a member of the National Association of Securities Dealers, the New York Stock Exchange and other principal exchanges. BNP Paribas Securities Corp. accepts responsibility for

the content of a commentary prepared by another non-US affiliate only when distributed to US persons by BNP Paribas Securities Corp. Japan: This commentary is being distributed to

Japanese based firms by BNP Paribas Securities (Japan) Limited, Tokyo Branch, or by a subsidiary or affiliate of BNP Paribas not registered as a financial instruments firm in Japan, to

certain financial institutions defined by article 17-3, item 1 of the Financial Instruments and Exchange Law Enforcement Order. BNP Paribas Securities (Japan) Limited, Tokyo Branch, a

subsidiary of BNP Paribas, is a financial instruments firm registered according to the Financial Instruments and Exchange Law of Japan and a member of the Japan Securities Dealers

Association. BNP Paribas Securities (Japan) Limited, Tokyo Branch accepts responsibility for the content of a commentary prepared by another non-Japan affiliate only when distributed

to Japanese based firms by BNP Paribas Securities (Japan) Limited, Tokyo Branch. Some of the foreign securities stated on this commentary are not disclosed according to the

Financial Instruments and Exchange Law of Japan. Hong Kong: This commentary is being distributed in Hong Kong by BNP Paribas Hong Kong Branch, a branch of BNP Paribas

whose head office is in Paris, France. BNP Paribas Hong Kong Branch is regulated as a Registered Institution by Hong Kong Monetary Authority for the conduct of Advising on

Securities [Regulated Activity Type 4] under the Securities and Futures Ordinance.

BNP Paribas (2014). All rights reserved.

coffee and currencies - international coffee organization march 2014... · the shifting exchange...

Documents